Your guide to low deposit home loans

If you’re ready to buy a house, but don’t have much saved, a low deposit home loan can help you make the dream of homeownership a reality.

12 Apr 2021 | Home finance & property | Share:

Low deposit home loans are an increasingly popular option for borrowers who have steady income but little in savings. Borrowers may be first home buyers, or those looking to buy an investment property, but with restricted savings. Many people think that you need at least a 20% deposit to get a home loan. But there are lenders who will approve qualifying borrowers for a low deposit home loan with as little as a 5% deposit.

What is a low deposit home loan?

A low deposit home loan is a standard home loan for borrowers without a large deposit saved. Traditionally, a bank would provide a loan of up to 80% of a home’s value, with the buyer expected to contribute the remaining 20% deposit. But 20% is no small figure: It takes time to save up that much, and life can get in the way. The good news is that today there are many loan options available and custom lenders understand that a borrower is capable of making home loan repayments even if they don’t have a 20% deposit.
So depending on the lender, and your personal circumstances, you could potentially get a low deposit home loan with a deposit as small as 5%.

Can a first home buyer get a low deposit home loan?

First home buyers often take out low deposit home loans, because they haven’t had time to accumulate significant savings. Australian states and territories offer various first homeowners grants and stamp duty exemptions or concessions to help eligible first-time buyers to buy a property with relatively small deposits. Some lenders may also accept gifted deposits for first home buyers. The reality is that many first-time borrowers get financial support from family members. However, not all lenders that offer low deposit home loans will accept gifted deposit monies. The more traditional lenders require evidence that the deposit has been saved consistently over time – usually over a minimum of at least three months. This assures the lender that the borrower can responsibly manage to pay regular loan repayments once the loan is in place.

What are the costs of a low deposit home loan?

A low deposit home loan typically represents a higher risk to the lender because the borrower is only contributing a small amount of their own money. For this reason, borrowers must pay a once-off premium called Lenders Mortgage Insurance (LMI). The borrower pays LMI to protect the lender in the event the property is sold, and the sale price doesn’t sufficiently cover the full loan amount including any accrued interest and costs. The LMI provider will then seek to recover any shortfall from the borrower. Depending on the loan amount and property value, LMI can cost thousands of dollars. Not great if you only have a 5% deposit to contribute. The good news is, there are lenders that will allow you to add the cost of the LMI premium into the low deposit home loan. That way, you don’t have to use your own savings to fund this expense and you can pay it over time. Different lenders set different criteria, so it’s important to do your research and find a lender who provides this feature.

Can I get a no deposit home loan?

In Australia, all lenders must adhere to responsible lending requirements, to ensure they don’t put a borrower into an unsuitable loan that creates unnecessary hardship. Lenders consider borrowers who can show strong savings behaviours less likely to default and put themselves in hardship. For this reason, lenders in Australia tend not to offer "no deposit" home loans. However, for borrowers who are asset rich but don’t have available cash for a deposit, a deposit bond can help. The deposit bond guarantees that you will provide 100% of the price to the vendor on settlement.

Can I get a low deposit low doc home loan?

If you’re self-employed and don’t have all your financial documentation available, you may be eligible for a low doc home loan. Lenders that offer low doc home loans will accept alternative income verification methods such as bank statements, business activity statements or an accountant’s letter instead of completed tax returns. However, most low doc home loans will require a higher deposit that is closer to 20% of the property price.

How to get a home loan with a low deposit

Here’s how to get a low deposit home loan in seven steps.

  1. Start saving Create a consistent habit of putting aside regular savings each pay cycle. Remember, when it comes time to apply for a loan, providing evidence that you can responsibly manage money will help your loan application.

  2. Research what government help is available If you’re a first home buyer, you might be eligible for government aid. Help for first home buyers varies between each state or territory. It may be that in your area a government grant is only available for newly constructed homes or up to a certain price point. It is also worth exploring any stamp duty exemptions or concessions available.

  3. Work out how much you can borrow With a low deposit home loan, your deposit amount will often determine how much you can borrow. However, your income will also contribute to your loan amount, which will set the budget for your home hunting. There are many handy online calculators that can help you work out your borrowing capacity based on how much you earn.

  4. Contact a trusted mortgage broker or a low deposit home loan lender If you only have a small deposit and are unsure which lenders offer low deposit home loans, contact a trusted mortgage adviser or mortgage broker. They will guide you through the loan options available to you based on your savings, your income and employment history. They’ll also be able to suggest any government help you may be eligible for. At this stage, you want to get pre-approval for the desired loan amount before you start looking at properties.

  5. Find a home or investment property Work with a real estate agent to find an ideal home or investment property that you can afford. Be sure to make any offer subject to finance. Your lender will need to approve the property before providing you with any unconditional loan approval.

  6. Provide any extra information requested Don’t worry if your lender asks for extra supporting information before providing formal loan approval. This is common, especially if it has taken you a long time to find that perfect property. The lender may ask you for an updated pay slip or savings statement to confirm you are still able to take on the loan.

  7. Sign the required documents and settle on your low deposit home loan Once formally approved for a low deposit home loan, all parties will need to sign loan documents. Take time to read these carefully. Your lender will give you a copy of the documents, for you to store in a safe place for future reference. Once your lender has confirmed all your documents are in order, they will arrange a date to settle with the seller. All you need to do is arrange to pick up the keys and move in!

How do I compare low deposit home loans?

There are many comparison websites that allow you to compare the interest rates, features, and requirements for various loans including low deposit home loans. It is important to remember that the cheapest interest rate on the market may not necessarily be the best loan for your circumstances. When looking for a low deposit home loan, you want to also consider the loan features available, whether any loan costs can be added to the loan and the lender’s track history, for example.

Do I need a broker to get a low deposit home loan?

A trusted mortgage broker can help take the stress out of the home buying process – whether you’re a first home buyer or an experienced investor. If you are seeking a low deposit home loan, a broker can help you find a loan that works for you and your long-term financial strategy. A good mortgage adviser should be able to give examples of how other customers have rated their performance. It’s important you can trust your mortgage broker to look after you. After all, buying a property is a big step and not something you do every day!